What to do when you inherit a house with a sibling

When a homeowner passes away, they can leave their home to a beneficiary, such as their child or children. Loss can come with a whole range of emotions, and the idea of inheritance may seem like an overwhelming process to navigate. In many cases, siblings inherit a property together and become its co-owners.

While inheriting a house can be a positive experience, it can also get complicated and stressful when family, finances, and grief get mixed together. If you find yourself in this situation, we’d like to help you understand how the process works and what your options are to give you a clearer understanding of your options. Here’s a rundown of what to do if you inherit a house with a sibling.

Key takeaways

• If you inherit a home with a sibling, you’ll have the option of sharing ownership, selling it, buying out their share, or selling them your share.
• Regardless of which option you choose, the first step is determining the current value of the home and how much is still owed on the mortgage.
• If you decide to share ownership, make sure you and your sibling are on the same page about how you’ll manage decisions about the house and the ongoing costs. 

Determining what you inherited with your sibling

The first step is understanding exactly what it is you and your sibling have inherited. Here are some questions to look into:

• Where is it located, and what are the property lines?
• Is there a balance on the mortgage, or is it fully paid off?
• How much are property taxes and homeowners insurance?
• What are the annual maintenance and repair costs?

You and your siblings will also want to get a hold of official documents pertaining to the property, including deeds, titles, wills, and land surveys.

Figure out if there are other beneficiaries

A beneficiary is anyone listed in a will that stands to benefit from the estate. However, estates aren’t always evenly split, and some beneficiaries may inherit a different percentage of the value of an asset. You’ll need to determine which beneficiaries were left partial ownership in the home. These beneficiaries will be responsible for deciding what the next steps are for the property.

Assess the value of your inherited assets 

Once you’ve figured out who else is involved, you’ll need to determine how much the property is worth, also known as its current market value. You can do this by having the home appraised by a licensed third-party appraiser.  If the contents of the property were also part of the inheritance, like furniture and art, you may hear the appraisal instead referred to as an accurate valuation. You can expect a home appraisal to cost anywhere from $300 to $600.

Determine if there’s existing debt

When you consider what the property is worth, you’ll also need to factor in any outstanding debt against the property. For example, the home may be worth $400,000, but the mortgage may have an outstanding balance of $100,000. That’s going to impact what each beneficiary will receive if you sell, or what you will need to be paid each month if you plan to keep the home. Other examples of debt against the property could include tax liens or other types of loans that used the home as collateral, like a second mortgage.

Options when you inherit a house with a sibling

Unless the will explicitly states otherwise, inheriting a house with siblings means that ownership of the property is distributed equally. The siblings can together decide between the following options:

• Keep the home and share the costs of ownership.
• Sell the home for income.
• Keep the home as a rental property and divide the expenses.
• Split the property and buy out another sibling’s shares.

Option 1: Agree to share ownership

Your first thought upon inheriting a home may be to decide which sibling will remain in ownership, but sharing ownership is possible and can even be enjoyable when the details are properly negotiated. Each sibling could split time using the home as a vacation property, or you could rent it out and split the expenses and income. Keep in mind that no sibling who has inherited partial ownership can be forced to own the home if they do not want to and must be allowed to sell their shares.

If you’ve decided to continue sharing ownership of the home, there are two main types of ways you can structure this arrangement - tenancy in common and joint tenancy.

Tenancy in common

With tenancy in common, each owner gets an interest in the property, which can be divided equally or unequally. Even if one person owns a higher percentage of the property, all owners have a claim, meaning no one individual can claim ownership over it. Each owner can sell or transfer their share in the property to another person without needing their co-owner’s approval. If a co-owner passes away, their interest is automatically passed to their heirs.

Joint tenancy

Unlike tenancy in common, joint tenancy means that all co-owners get equal shares, or an equal amount of interest, in the property. Ownership can’t be passed down to heirs. If a co-owner dies, their share of ownership is automatically passed to the surviving co-owner. Shares in the property can’t be sold without the consent of all co-owners.

Like tenancy in common, joint tenancy allows you to transfer your shares to another person. However, that person can’t enter the joint tenancy and instead enters a tenancy in common with the remaining co-owner.

Option 2: Sell and divide the profits

If you and your sibling have agreed to sell the home, then you’ll definitely be needing that professional appraisal to determine the market value of the property. The results of the appraisal will have a big impact on the listing price you both agree to and how much each sibling will ultimately stand to profit.

You also determine who in or outside of your family will have the right of first refusal, which is a clause in a real estate contract that gives a particular party first dibs on making an offer on the property. This means that the potential buyer has the right to be the first to put an offer on the property when it’s listed on the market if they choose. If another party also expresses interest, the buyer with the right of first refusal has the option to purchase the property over the other interested party or decline the opportunity and allow the seller to consider other offers.

If you and your sibling have decided to sell the home you’ve both inherited, here are some steps to take:

1. Prepare the home for sale. This can include deep cleaning the home, making necessary repairs, and boosting curb appeal.
2. Hire a real estate agent. Finding an agent who’s experienced with the local market can help you determine a listing price, market the home, and show it to prospective buyers.
3. Find a buyer. Depending on the property and current market conditions, you may get multiple offers, or it may take time to find a buyer.
4. Accept an offer and close on the home. Once you’ve found an offer you and your sibling agree to accept, you’ll close on the home and complete the sale.

Will you have to pay the capital gains tax?

Capital gains tax is something you must pay when you sell an asset that has increased in value since the time you bought it. If you sell your home quickly enough after inheriting it, you may not need to pay capital gains tax, as the home’s value likely won’t have changed.

Option 3: Rent the house and split the profits

If neither sibling wants to sell the family home, renting it out could be a source of revenue for any sibling that has a stake in the property. In fact, it could even be possible for one or more siblings to live in the house alongside any renters.

Sharing a rental or vacation home also requires work, and expenses and can get complicated, depending on who’s involved. Here are some tips on how to manage a home you’ve inherited with a sibling and want to turn into a rental property.

Create an expense account

Each sibling will be responsible for their share of the property expenses. Creating an expense account can be a helpful way to ensure all co-owners are contributing equally for any mortgage payments, maintenance, or renovations on the home. An expense account will also help you track your money and stay organized, particularly if you’re receiving rental income on the home. Here’s a list of expenses you can except:

• Any outstanding mortgage payments
• Property taxes
• Homeowners insurance
• Utilities
• Maintenance and repairs

Hire a property manager

Having a dedicated property manager means hiring someone to be in charge of rent collection, upkeep, repairs, and communicating with renters. This may be an especially attractive option if you don’t live near the property. The cost of hiring a property manager can be split between the siblings and help you avoid conflict with the day-to-day operations.

Form a governance board

This option is mostly relevant if there are multiple, ever-expanding stakes in the property due to various heirs. For example, if two siblings share equal ownership of the property and both siblings have two children whom they plan to gift their shares to, the next generation will split the ownership four ways.

The more co-owners there are, the more potential there is for disagreements on what to do with the property. Creating a governance board, which functions similarly to a condo board, can streamline decision-making and take some pressure off the family.

Option 4: Ask the courts to mediate the conflict

Involving the court is usually a last resort, but if you and your sibling can’t reach an agreement on what to do with the property, you may need a partition suit. Partition lawsuits ask the judge to order the home’s sale to terminate the co-ownership, but the legal process usually isn’t simple. Remember, you or your sibling cannot be forced to own a property that you don’t want, but you can be ordered by a court to sell.

The judge will typically require a mediator to mitigate conflicts between the co-owners. This mediator is an additional expense on top of what you’ll already have to pay a real estate agent to sell the home. You may even need to hire an accountant to divvy up the proceeds, which can seriously limit your profits.

To avoid these extra costs, try to settle any conflicts with your sibling on your own by using other avenues. For example, if you want to keep the property and your sibling wants to sell, you could buy out their interest in the property.

Option 5: Buy out your sibling’s interest in the property

Most properties are inherited evenly, so unless otherwise stated, you and your sibling likely have 50/50 ownership of the home. If one sibling wants to buy out the other, this means they would need to finance half of the home’s value.

Here are some common reasons why a buyout might be the solution you choose:

• You want to keep the property, but your sibling does not.
• You and your sibling don’t get along and wouldn’t be able to manage it together.
• One sibling can’t afford the costs of co-ownership.
• One or more of the siblings lives outside of the country.

Here’s how to buy out a sibling on a shared property:

1. Order an appraisal. Just as you would if you were planning to sell the house, the first step is to order a home appraisal, or a property valuation,if the assets are included. This will determine how much the home is worth and how much you would need to pay to buy out your co-owner.
2. Calculate the equity. Once you’ve determined the current value of the home, you can calculate the amount of equity you and your siblings have based on how much is still owed on the mortgage or other liens against the home. If you and your sibling have 50/50 ownership, the total equity will be split in half, and that’s the amount you’ll need to buy your sibling out.
3. Create a distribution agreement. This will include the value of the property, total equity, terms of the buyout, and the amount each beneficiary will receive.
4. Finance the buyout. You can use an inheritance loan, also known as an estate loan, to borrow the money you need to buy out your sibling on the property. Because this money is backed by expected inheritance, it will need to be repaid once the inheritance is distributed.
5. Pay your sibling the agreed-upon amount. Once your sibling has been paid out, you can have the property transferred out of your estate and into your name.
6. Refinance your inheritance loan with a traditional long-term loan. Once the title is in your name, you can refinance the inheritance loan with a mortgage from a conventional lender or bank.

The bottom line: You and your sibling have options

Inheriting a home with sentimental value and a considerable amount of equity can be an emotional process. If you’ve inherited the home with one or more siblings, you may not always see eye-to-eye on what to do with property, but it’s important to remember that you have options. You can keep the home and share the costs, rent it out, sell it for income, or buy out your sibling’s shares.

If you’re interested in selling a house or finding out more about the costs of owning a second home, read more in the Rocket Mortgage^® learning center and take control of your options.